The Covid virus has sharpened the need to prepare in advance for extreme scenarios • What are the common savings routes, what types of savings are suitable for, and how much money should be deposited in each of them, these are the topics of this article.
Saving means giving up using our money in the present, in order to use it in the future. While it is impossible to know exactly what our lives will look like in a few years. However, there are a number of things that will probably be true for most of us for whose sake we will have to keep capital aside. For example, in case we lose our livelihood, we must prepare for it in advance.
In addition, naturally, we all have aspirations and desires, and often cost more than we can afford. For these reasons, transferring money to savings will allow us to plan our monthly expenses accordingly, and will more likely ensure we save.
Looking to the personal future: long-term savings
Most of the time, when we are saving for the long term, we will prefer to engage in the present tense over the future. To save for the age of eighty? Who even promises that I will reach this age? Well, if we look at the average life expectancy in Israel, the chances of us reaching this age are not low at all.
In order to incentivize us to save for the long term, the government takes a number of measures such as mandatory pension law, granting tax benefits for savings, the savings will not be liquid except when retiring, savings withdrawals will be possible through a minimum annuity and more.
The long-term savings instruments currently on the market are a pension fund, executive insurance, and provident fund. For the differences between them and who each one is suitable for – we will dedicate a separate article below.
However, when choosing to save through a pension fund or through executive insurance, the product itself includes two types of insurance in addition to long-term savings – disability insurance and life insurance. The purpose of two insurances is to cover a situation where you have reached retirement age when your health is not at its peak, so you will have to stop supporting your family. The purchase of the above insurances is done as part of the deposit, ie if you deposit a thousand shekels a month to the pension fund or executive insurance, then the cost of purchasing disability insurance and life insurance is reduced, and the rest of the money is used for long-term savings.
The more expensive the insurance, the lower the money spent on savings. This creates situations in various executive insurance plans, which after decades of savings, the amount accrued is very low, due to expensive insurances that have been loaded on the deposit. It is important to note that as long as the deposit is current, the insurance is valid. If you stop depositing in the pension savings device, the insurance coverage will be canceled, and the money you have accumulated will be available to you for use at retirement age.
So how much is it worth depositing? Because these devices enjoy tax benefits, the government has limited the deposit to them. A provision that exceeds this, for example, for people who earn very high, will be transferred to another savings instrument that does not enjoy tax benefits. what does a long-term savings deposit consist of?
These savings are primarily for emergencies. For example, if the breadwinner of the family can not continue working. There are ups and downs in life, and even if you seem to be on solid ground, things can change because of independent circumstances, as the Corona plague has taught us. Therefore, every family cell needs emergency savings, which can allow it to get through these periods.
In addition, the main reason that separates the types of savings concerns the level of risk. The shorter the savings term, the more conservative approach is to take the risk we take so that it will not be affected by market volatility, and we will not be in a situation where we have to use it a moment after incurring losses. In this savings we will not expect a significant return, nor will we worry about a significant loss, and it will be available and liquid for us.
The choice of the instrument of the savings will be made according to a parameter of the cost of management. Because the solid channels yield a zero return, choosing an expensive savings instrument, for example, which has a management fee of 0.7% on an annual level, will erode the savings. Therefore, in solid channels, it is possible to simply leave the money in the bank.
In addition, there are many theories on how to calculate emergency savings. In the end, the money we will leave in short-term savings should be a balance between the amount we estimate we will need in case of an emergency, and how much money we are willing to leave in the channel with no return.
Another alternative is private savings (savings not found in a pension device) for the medium-long term is the savings where we are required to adopt a proactive and dynamic approach in order to maximize it. There are countless ways to save for this time frame, and it includes a plethora of different savings instruments: those with tax benefits, built-in instruments, and independent management from the level of ETF selection to the level of investing in selected stocks. In the next article, we will start diving into this segment of savings.